Quick Computing currently sells 17 million computer chips each year at a price o

Question

Quick Computing currently sells 17 million computer chips each year at a price of $22 per chip. It is about to introduce a new chip, and it forecasts annual sales of 15 million of these improved chips at a price of $28 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 8 million per year. The old chip costs $7 each to manufacture, and the new ones will cost $10 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (Enter your answer in millions.)

Quick Computing currently sells 17 million computer chips each year at a price of $22 per chip. It is about to introduce a new chip, and it forecasts annual sales of 15 million of these improved chips at a price of $28 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 8 million per year. The old chip costs $7 each to manufacture, and the new ones will cost $10 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (Enter your answer in millions.)

Explanation / Answer

The cash flow for the company shall be the difference between the Sales price and the cost of purchase.

In the current scenario the cash flows are following:

($ 22- $ 7) x 17,000,000= 255 million

When the new chips are manfactured in that case the cash flows shall be:

The cash flows shall be following:

($ 28-$ 10) x 15 =270 million

Add: Sale of Old Chips

($ 22- $ 7) x 8=120 million

So nbew cash flows shall be 290 million and in comparison to previous cash flows it shall increase by 35 million

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